Not Your Father's Detroit

In the mid-1950s, the Ford Motor Company decided that its most profitable car needed a new home. Up until then, Ford had been making Lincoln Continentals in Highland Park, the industrial enclave near the center of Detroit, where the company had first put down its roots. In 1957, though, it moved its Lincoln production line to its shiny new plant in Wixom, a rural community soon to become suburban, located about a half-hour's drive from Detroit. In short order, Wixom was not only turning out all of Ford's Lincoln models, but also that most classic of 1950s cars, the Thunderbird.

Modern American manufacturing -- in some sense, modern America -- had begun in Highland Park. In 1913, Henry Ford opened his first real factory there, featuring the world's first large-scale assembly line. The following year, he announced that he'd pay his employees an unheard-of $5 a day, based on the theory that if they made Model-T's, they should be able to buy them. In fact, the purchasing power of Ford workers didn't become truly substantial until the United Auto Workers (UAW) unionized the company in 1941; thereafter, the discontents of factory work notwithstanding, the economic life of Ford workers became, in a sense, a marvel of the world. As members of the predominant union in the predominant industry in the predominant economy on the planet, the auto workers at the Big Three enjoyed not only good pay but the nation's first comprehensive health insurance, supplemental unemployment insurance, generous pensions with retiree health coverage -- all paid for by the companies, which had no trouble covering these costs.

It was a good life, and it was passed down from father to son. Dave Berry's grandfather came from Tennessee to work at Ford's giant River Rouge plant in 1925. His father went to work at Wixom, and 17 years ago Dave followed him into the plant, where today he heads the UAW Local. And by every available measure, the plant managers and the Local have crafted a marvel of production.

Most auto plants essentially build the same car with minor brand variations -- the “platform,” as it's called, is the same, but different grillwork and a different name get slapped on at the end of the line. At Wixom in the mid-1990s, the managers and the employees, working in small groups, re-engineered the plant so that it turned out three different platforms on the same line. Lincolns, Mustangs, and even a Ford LS stick shift with the steering wheel on the right (for the Japanese market) rolled off the line. For four consecutive years, Wixom placed first in Ford's internal evaluation of all its plants' efficiency and productivity. And on Berry's wall hangs an award from J. D. Power and Associates, which ranked the plant the third best auto factory in North or South America -- coming in ahead of any Japanese transplant -- in 2005.

Today, that award is the coldest of cold comforts. Two years ago, Ford announced that it would produce its new Lincoln Zephyr not at Wixom, but at a plant in Mexico -- a reduction in work that diminished the Wixom work force from 3,750 to its current 1,450. Then, this January 23, Ford announced it would lay off 34,000 workers and shutter 14 factories by 2007, and Wixom was on the list. Virtually all the Wixom workers caught up in the earlier round of layoffs had been able to transfer to other Ford plants, but the remaining workers -- the ones with the most seniority; their average age is 49 -- don't think for a moment that the leaner, meaner Ford will have a place for them. Nor are the ones eligible for retirement confident that Ford will honor its commitments to them once they're gone.

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In February, I spent several hours at the UAW Local hall, directly across the street from the Wixom plant, with Berry and a dozen of his members. They were understandably reeling -- their pride in their own work only sharpening their critique of the company. “It was the quality of the plant that kept us alive, not the cars,” said Tony Brooks, who heads the Local's military veterans' committee. “When did they last redesign the Town Car?” Over two hours, the members ran through a catalog of the things Ford had invested in -- Jaguar, Fiat, ventures outside auto altogether -- rather than redesign its own cars. Like General Motors, Ford made most of its profit over the past couple decades from luxury cars, pick-ups, and SUVs (or it did until gas prices sky-rocketed), and Wixom had been a major profit center -- the revenues from its Lincolns rolled over into constructing and revamping its truck plants. But in recent years, even as General Motors was redesigning its entire Cadillac line, Ford did little to upgrade or reinvent the Lincoln, whose sales have fallen by 36 percent since 2000. Ford's health insurance and legacy costs, tacking on more than $1,000 to the sticker price of every vehicle it produced, added a particular burden to its U.S. production costs (globally, Ford made a $2 billion profit last year, though it lost $1.55 billion within the United States).

The problem -- America's problem -- is that the abrupt end of the living standards that Wixom workers enjoyed isn't exceptional; it's emblematic. Across the economy, the wages and benefits of ordinary Americans are under assault. The new model American manufacturer, which once may have offered wages and benefits comparable to the Big Three, has typically cut its wages to somewhere between a half and two-thirds of what Ford and GM have been paying. Highly profitable Caterpillar Tractor, for instance, now offers its new hires just $22 an hour in wages and benefits, half what it pays its more senior employees. “There is a balance that must be struck,” Caterpillar group president Douglas Oberhelman told The New York Times, “between being competitive and being middle class.”

The decline in income is hardly limited to manufacturing. A new survey of the nation's 361 metropolitan areas, which account for 86.3 percent of the nation's GDP, has found that the average wage of jobs lost in the recession of 2001-2003 was $43,629, while the average wage of jobs created in 2004-2005 was $34,378 -- a tidy 21 percent decline. While productivity increased by 11.7 percent between 2001 and 2004, median household income rose by a scant 1.6 percent.

The crisis of living standards is also reflected in the collapse of the employer-provided welfare state that's been the norm for the past half-century. A Kaiser Family Foundation study from last year, for instance, finds that while 66 percent of companies with 200 or more employees offered retiree health benefits in 1988, just half that number -- 33 percent -- do so today. In the past year alone, such pillars of high-tech as Hewlett-Packard, Verizon, Motorola, and IBM have terminated their traditional defined-benefit retirement plans.

Indeed, the new economy appears to hold out no more hope for mass prosperity than the old one. The trade deficit in our high-tech sector is expanding faster (it grew by 20.4 percent last year to $44 billion, contrasted to a surplus of $15 billion as recently as 1999) than our trade deficit overall (which grew by 17.5 percent last year). The problem is not that we lack for engineers and scientists, but that we are creating historically low levels of jobs for them, as more and more U.S.-based companies shift their research and development to low-wage nations. The problem is that in the current recovery, unlike any recovery since the advent of the New Deal, almost all new revenue to corporations is going to profits, and virtually nothing to wages. (In the five recoveries before the current one, 25 percent of new corporate revenues went to profits and 75 percent to employee compensation; in the current recovery, 59 percent has gone to profits and just 41 percent to compensation.)

The middle is falling out of the American economy. At first glance, from a sufficient distance, we may appear to be doing just fine. The GDP, after all, grew by 3.6 percent last year; unemployment has fallen to 4.8 percent. But what once distinguished the United States among the nations of the world was not simply the volume of our wealth, but our distribution of that wealth. In the decades following World War II, we were something new under the sun: the nation with the first middle-class majority. Between 1947 and 1973, productivity in the United States rose by 104 percent. Median family income in the United States. also rose by 104 percent. Since then, however, productivity gains have outpaced median family income by a margin of three to one, and in recent years, by eight to one. Indeed, as Northwestern University economists Ian Dew-Becker and Robert Gordon have demonstrated in a recent study, over the past couple of decades, all the income from productivity gains have gone to the wealthiest 10 percent of our countrymen.

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To any dispassionate economic historian, it's no mystery how America managed once to attain broadly shared prosperity. Between 1875 and 1975, the level of schooling for the average American increased by seven years, with a sharp increase in the number of college-educated Americans in the decades following World War II. Our technological innovation, often spurred by the investment of federal defense dollars, was second to none, and those innovations were turned into products at factories here in the United States. Unionization was at an all-time high in the years that median income tracked productivity, so high that the wage-and-benefit packets at unionized firms set the standard for non-union firms, too. Immigration was at an all-time low. We encountered little competition from other nations' economies.

None of these conditions pertain any more. Americans' level of schooling has stopped rising after a century of steady increase, and even if it were continuing, a raft of new studies suggests that many of these good jobs of the future will be offshored to cheaper climes. We shun industrial policy, while our competitor nations entice our corporations abroad. Unions, which once represented 35 percent of the workforce, now represent 12.5 percent, and just 7.9 percent in the private sector, ushering in an age of wage and benefit reductions. Globalization of production has enabled the majority of leading American corporations to get cheaper labor abroad and reduce labor costs at home.

Taken together, these changes have largely negated virtually all our theories about how to create mass prosperity. That's not to say there aren't discrete policies that we liberals could implement if we had the power, some of which would have vast positive impacts. Nationalized health insurance would take a huge burden off of employers with older work forces, and enable them to compete more easily with foreign companies whose health-care costs are picked up by their governments. We could provide wage insurance to workers forced to move to lower-paying jobs, as many are, with the government paying a fraction of the difference between their old paychecks and their new ones. We could raise the minimum wage. We could amend labor laws so that workers who wish to join a union could do so without fear of being fired, and hope that that would enable those unions -- trying to organize non-offshorable workers whose jobs can't be outsourced -- to succeed.

But none of these changes would fundamentally alter the DNA of American financial and corporate institutions, which ceaselessly impels them to disaggregate firms, outsource work, and find the cheapest labor in a world brimming with cheap labor. In the world these institutions shape -- and that is the world we live in today -- generating broadly shared prosperity amounts to squaring a circle.

This is a crisis for the nation; it is a crisis for all advanced economies to the extent that our brand of capitalism comes to dominate theirs. But it is particularly a crisis, and challenge, for liberals and Democrats in the United States and for Social Democrats (and even social Christians) in Europe and other advanced economies. For, at heart, the parties of the left and center left are the parties of broadly shared prosperity. That is their -- our -- raison d'être. In any given election, the inability to lay out a plausible scenario for renewing mass prosperity is not likely to leap out as the Democrats' most glaring deficiency. But it creates a terrain on which bad stuff can happen. The alternative to a politics of economic advancement is often a politics of social resentment. The steadily declining income of white working-class males over the past quarter-century correlates to their increasingly rightward voting habits. We can't prove the correlation is causal, but does anyone believe it's coincidental?

With such pillars of the economic establishment as Paul Samuelson (doyen of American economists) and Andy Grove (doyen of American high-techies) now fretting audibly about the effect of China, India, and the global labor market on American worker incomes, the question of how to retain or rebuild mass prosperity in the United States has become an official (which is not, in the Bush years, to say governmental) topic of concern. That doesn't mean we are awash in plausible solutions, however. The problem is not how to engender growth; the economy is growing. The problem is that growth, in our current form of capitalism, often comes at the expense of the majority of our countrymen. And that's a problem that requires a very deep fix.

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Can America survive American capitalism? Only if it fundamentally alters the way we do business. Herewith, three immodest proposals:

• First, revive industrial policy. We haven't had an industrial policy discussion in the United States in some time -- since the early 1990s, in fact. It's easy to understand why we had one then: From the late 1970s through the early 1990s, America lost 2.4 million manufacturing jobs.

Now, in the past five years alone, we've lost 2.7 million manufacturing jobs. But there is no great public conversation about this. The reasons for this silence are many. There's the declining political weight of the manufacturing sector (both companies and unions) in both political parties. There's the corresponding rise of the political clout of the financial sector (a driving force in America's deindustrialization) in both political parties. There's the prosperity of the late 1990s, which led many to believe that high-tech could engender a sustained, widespread economic boom as manufacturing had once done.

Of course, high-tech did nothing of the sort. Not only did it fail to bolster incomes in other sectors of the economy, it hasn't provided rising incomes to its own employees since the bubble burst in 2000. For one thing, the number of jobs in science and engineering is not increasing. According to the Bureau of Labor Statistics (BLS), we have generated just 70,000 new jobs in engineering and architecture over the past five years, and the BLS does not project an increase in high-skill employment over the next decade. In raw numbers, the fastest growing occupations between 2004 and 2014, says the bureau, will be retail salespersons, nurses, post-secondary teachers, customer service representatives, janitors, waiters, food-preparation workers, and home-health aides. Five of the 10 fastest-growing occupations fall under the BLS's designation of very-low income -- which the BLS defines as an annual income under $20,184. In such an economy, sending more people to college is not really a panacea. In 2002, says the bureau, 26.9 percent of all jobs in the United States required college degrees; in 2012, that will rise to just 27.9 percent -- one measly point.

Much of the problem is that many highly skilled professionals have jobs that are increasingly offshorable. Last year, economists J. Bradford Jensen of the Institute for International Economics and Lori Kletzer of University of California-Santa Cruz concluded that it's skilled workers in general and scientists, mathematicians, and engineers in particular who are vulnerable to having their jobs exported. “Across all occupations,” they write, “workers in tradable occupations receive 9 percent higher wages than workers in non-tradable occupations. For ‘high-end' service occupations, workers in the tradable sector receive almost 13 percent higher wages … .” For confirmation of Jensen and Kletzer's hypothesis, simply turn to a study by economists Jerry and Marie Thursby (of Emory and Georgia Tech, respectively) published this February that surveyed 200 U.S.-based multinationals. The Thursbys reported that 38 percent of the companies planned to relocate at least some of their research and development facilities to other nations, chiefly India and China. “More companies in the survey,” the authors wrote, “said they planned to decrease research and development employment in the United States and Europe than planned to increase employment.” (“Having internationalized the hands,” says chief AFL-CIO economist Ron Blackwell, “they're busy internationalizing the mind.”)

The export of our high-end manufacturing may be one factor hastening the export of American research and development. As former Reagan administration Commerce Department official Clyde Prestowitz has pointed out, the U.S. armed forces have unparalleled night-vision capacity because of the work of U.S. scientists with cadmium mercury telluride semiconductor materials. The manufacturers of such materials, however, are located in Japan, and now the research scientists have moved there, too. The army may claim to own the night, but, in actuality, it's renting it.

The movement of strategic manufacturing abroad was of sufficient concern to the President's Council of Advisers on Science and Technology that in their 2004 report they noted, “[the] research to manufacturing process is not sequential in a single direction, but results from an R&D-manufacturing ecosystem [so that] … new ideas can be tested and discussed with those working on the ground.” There are fewer such ecosystems of this kind in America today.

There are also fewer strategic industries. The vast majority of machine tools used in U.S. factories and shops are made abroad now. With them have vanished the American workers capable of working with high-end machine technology. Having received a spate of new aerospace contracts, Boeing is currently hiring new workers at its Wichita plant, and, according to Machinists union international president Tom Buffenbarger, is “scouring the country for tool and die makers and instrumentation mechanics, because we don't have them any more.”

Indeed, if deindustrialization were to continue apace, it's not clear that America would have the work force and the facilities to produce the goods we'd need to close our massive trade deficit. “If we're in the business of making things with fewer workers, that's okay,” says University of California-Berkeley economist and former Clinton administration Treasury Department official J. Bradford DeLong. “If we're out of business altogether, that's something else. I worry that a lot of manufacturing capacity we could get back now we may not be able to get back in a couple of years.” The promise of global trade, after all, is that we will one day be able to sell many billions of dollars of products to the newly minted middle class of China and India. If we can't, if we're no longer making what several billion new consumers would want to buy, then our economic straits would be something worse than dire.

So we need an industrial policy, to cajole and compel American corporations to make strategic investments in America. The bipartisan reaction against the administration's proposed Dubai-port deal points to a broad public awareness that the nation's security interests are not invariably well-served by the calculus of the marketplace. Surely, the offshoring of our scientific and high-end manufacturing capacity poses a threat to our economy every bit as dangerous to our long-term security as the sale of our harbor operations. Yet the federal government and the entire financial community view any effort to induce U.S.-based corporations to invest at home as heresy. Meanwhile, the Chinese government routinely picks up the costs of building factories and training a workforce for American corporations seeking to move there. “Because we hate having U.S. bureaucrats pick winners and losers,” Prestowitz has written, “we outsource the job to Chinese bureaucrats.”

One strategy for in-sourcing American industry is to have the government -- abetted by public- and union-controlled pension funds -- upgrade the physical infrastructure, lower energy costs (through vast retrofitting projects), undertake industry-specific worker training, and offer companies tax credits in return for their commitments to invest and hire locally, pay decently, and contract with their suppliers regionally. (We make a better country, you become a better citizen.) Such a strategy describes the project that Wisconsin-based political scientist Joel Rogers and Michigan-based auto industry analyst Dan Luria have undertaken to enlist the governors of the industrial Midwest -- the area most decimated by outsourcing -- to build a regional consortium to attract industrial investment. Those principles run so counter to the strategies -- more than that, the instincts -- of our current capitalism, however, that our capitalism probably must be altered if genuine in-sourcing is to occur.

• Second, upgrade all non-offshorable work. Casual observers of unions could have been forgiven last summer if they failed to fathom what the unions that left the AFL-CIO to form the Change to Win Federation had in common. Politically, the unions ranged across the spectrum. What united them was that they represented workers whose jobs could not be exported: nurses, truckers, supermarket clerks, carpenters, laborers, hotel workers, and janitors. Together, they represented 6 million workers -- which left, by their count, 44 million workers in those sectors unorganized.

We may not think of these jobs as commanding decent wages, but in fact, union density is determinative here. Hotel room maids in cities where hotels are almost entirely unionized make $20 an hour; in cities that are half-unionized, $12 an hour; in non-union cities, $7 an hour. In heavily unionized Las Vegas, hotel workers can avail themselves of employer-funded training programs to advance to more highly skilled jobs, and make enough to buy homes that would be far beyond the reach of hotel workers in non-union towns. In the largest unionization drive currently underway in the nation, UNITE HERE (the hotel workers union) is using the threat of a strike this summer against hotels in most unionized cities to compel some national chains to agree not to oppose the organization of their workers in non-union cities.

Nobel laureate economist Robert Solow, currently working on a Russell Sage Foundation study comparing low-wage work in Europe and America, believes that upgrading service-sector work is crucial for the American economy. Pessimistic about the future of domestic manufacturing, Solow notes that some European nations make civil servants of child-care and elderly care workers, and pay them accordingly. “We usually think of a revived WPA creating employment in construction and manufacturing work,” he says, “but if it's not focused on the service sector, it won't be that useful. That's where the demand is.” One such neo-WPA proposal, appearing on California's primary ballot this June, is Rob Reiner's initiative to create universal preschool for the state's four-year-olds, funded by a tax on the wealthiest Californians. The measure includes $700 million to provide college training and credentials to child-care providers, and provisions that would enable them to form unions.

Professionalizing and unionizing non-offshorable work would help reinvent broadly shared prosperity in America. But it would not necessarily offset the effect of downscaling occupations that can be shipped abroad (indeed, the diminution of the manufacturing labor pool increases competition in the service-sector labor pool). “Andy [Stern, president of the Service Employees International Union and the leading figure in the drive to organize non-offshorable workers] thinks you can grow a union inside these limitations,” one leading labor official comments. “I doubt it. The neo-liberal system incentivizes employers to compete with each other in the worst possible way. You can't fix this at the workplace. We don't have business leaders who will say, ‘We want to make money, but we also want to build a strong national economy.' You can't solve our problems unless you constrain these guys to focus on that.”

• And so, third, constrain business leaders by changing corporate governance. In the evocative words of business writer Barry Lynn, the CEO “was once the company's man in the boardroom. Now, he's the investors' man in the company.” Even that may be giving corporate leaders too much credit, since the model CEO not only seeks to enrich the shareholder at the expense of employees, but himself at the expense of the shareholder. A 2005 study of 20,000 firms by economists Lucian Bebchuk and Yaniv Grinstein finds that the percentage of the typical firm's total earnings paid out in compensation to the company's top five executives grew from 5 percent in 1993-1995 to 10 percent in 2001-2003. Bebchuk and Grinstein conclude that out of the $83 billion that the 99.99th percentile of wealthiest Americas reported on their taxes in 2001, $48 billion was the income of companies' top five executives, which averaged $6.4 million (CEO salaries averaged $14.3 million). With their salary and benefit levels set by corporate boards and compensation committees on which their fellow CEOs sit, the men who run American business are paid a fortune to retain a fortune. Nice work if you can get it.

But the case for corporate clean-up goes well beyond the need to end legalized looting. Unless statutory changes force corporate and investment-fund boards to exclude back-scratching CEOs and include a majority of employee and public representatives, disinvestment in America -- at least, the America of decently paid work -- will continue apace. This is not to negate the importance of restoring progressive taxation and the right to join unions and a hundred other necessary reforms. It is to say that American capitalism itself is, in its exploitation of globalization, the most fundamental threat today to American living standards. If the era of mass prosperity that began at Highland Park is not to end at Wixom, the nation must reclaim its economy.